The debate over Britain’s tax system has intensified ahead of Labour’s highly anticipated first Budget, with former Labour leader Lord Neil Kinnock calling on Prime Minister Andy Burnham to overhaul capital gains tax by aligning it with income tax rates. The proposal, which supporters argue would generate an additional £12 billion annually for the Treasury, has already sparked fierce disagreement among economists, investors and opposition politicians.

With Chancellor John Healey preparing to unveil Labour’s first Budget on October 28, speculation is mounting over how the Government intends to repair the nation’s public finances while maintaining its promises to improve public services and stimulate economic growth. Among the options being widely discussed, changes to capital gains tax (CGT) have emerged as one of the most politically sensitive.

Lord Kinnock Pushes for Tax Reform

Speaking in an interview with The i Paper, Lord Kinnock insisted that the current gap between capital gains tax and income tax is difficult to justify, particularly at a time when the Government is searching for additional revenue.

According to the former Labour leader, equalising the two tax systems would represent a fairer approach while providing billions of pounds that could be invested in Britain’s struggling public services.

“I’m sure that the Government understands the utility and the encouragement which the further £12 billion revenues that such a fair change in CGT would bring,” Lord Kinnock said.

His intervention carries considerable political weight. Burnham has previously described Kinnock as one of the politicians who most influenced his own political thinking and recently praised the veteran Labour figure as an important mentor while outlining his vision for a more interventionist government.

Why Capital Gains Tax Matters

Capital gains tax is paid when individuals make a profit from selling certain assets, including shares, investment properties and businesses.

Unlike income tax, which applies to earnings from employment, CGT currently benefits from significantly lower rates.

At present:

• Basic-rate taxpayers generally pay 18 percent.

• Higher and additional-rate taxpayers pay 24 percent.

Income tax, by comparison, is charged at:

• 20 percent for basic-rate taxpayers.

• 40 percent for higher-rate taxpayers.

• 45 percent for additional-rate taxpayers.

Lord Kinnock believes this difference allows wealth generated through investments to be taxed less heavily than income earned through work—a disparity he argues is increasingly difficult to defend.

If Labour adopted his recommendation, investors could face substantially higher tax bills whenever they sell profitable assets.

Budget Expectations Continue to Grow

The timing of Lord Kinnock’s comments is particularly significant as Chancellor John Healey finalises Labour’s first Budget.

The Government has repeatedly warned that Britain’s finances remain under considerable pressure after years of sluggish economic growth, rising borrowing costs and increased spending commitments.

Prime Minister Andy Burnham has already acknowledged that the Government may need to ask the public “for a little more” in order to restore stability to the country’s finances.

Labour has also argued that previous governments made long-term economic mistakes by reducing the state’s role in the economy while expanding private ownership.

Burnham recently claimed Britain had taken “a series of wrong turns in the 1980s,” arguing that political power became increasingly centralised while economic power was largely privatised.

Those remarks have reinforced expectations that Labour’s Budget could mark one of the most significant shifts in economic policy for decades.

Senior Ministers Support the Proposal

Lord Kinnock is not alone in backing changes to capital gains tax.

Several senior members of the Government have already expressed support for aligning CGT with income tax.

Among them are First Secretary of State Louise Haigh and Defence Secretary Wes Streeting, both of whom have publicly argued that the current system should be reformed.

Supporters contend that treating income from investments in the same way as earnings from employment would make the tax system fairer while ensuring wealthier individuals contribute a greater share toward funding public services.

Many on Labour’s left also believe higher taxes on investment profits would help finance spending on healthcare, education, infrastructure and social care without requiring broad increases in income tax.

Economists Warn of Unintended Consequences

Despite political support, many economists remain unconvinced that higher capital gains tax rates would actually produce the additional revenue Labour hopes to collect.

Research conducted by investment platform IG, using HMRC’s own behavioural assumptions, suggests the opposite could happen.

Rather than raising an extra £12 billion annually, the study estimated that matching CGT to income tax rates could reduce government revenues by approximately £7.8 billion each year.

The reasoning is relatively straightforward.

When tax rates rise sharply, investors often delay selling assets in order to postpone paying tax. Others may restructure investments, move assets overseas or adopt alternative tax planning strategies.

As a result, fewer taxable transactions occur, reducing the total amount of tax collected.

This behavioural response has long complicated attempts by governments to maximise tax receipts.

Jeremy Hunt Raises Concerns

Former Conservative Chancellor Jeremy Hunt has also criticised proposals to raise capital gains tax dramatically.

Writing in The Telegraph, Hunt revealed that Treasury officials had previously advised him that the existing 24 percent rate was already close to the level that maximised government revenue.

According to Hunt, increasing rates beyond that point could prove counterproductive.

“Treasury officials told me that 24 percent was the revenue-maximising level for capital gains tax,” Hunt wrote.

“That’s because when tax rates change, people change their behaviour and delay selling assets. Go too far in raising tax and revenues start to fall.”

His warning echoes concerns frequently expressed by economists regarding the so-called “Laffer Curve,” which argues that beyond a certain point, higher tax rates can actually reduce overall tax revenue.

Investors Already Facing Higher Taxes

Many investors argue they have already experienced significant tax increases over recent years.

One of the biggest changes has been the reduction in the annual capital gains tax allowance.

The tax-free allowance has fallen dramatically from £12,300 during the 2022-23 tax year to just £3,000 today.

This means many more individuals are now paying CGT than in previous years, even without any increase in tax rates.

Investment professionals warn that another major increase could discourage long-term investing, entrepreneurship and business creation.

Joshua Raymond, market strategist at investment platform XTB, believes lower capital gains tax has traditionally reflected the risks associated with investing.

Unlike employment income, investment returns are never guaranteed, and investors can lose substantial amounts of money.

“The lower CGT rate provides an incentive against that risk,” Raymond explained.

“If the two were aligned, that recognition would be lost.”

Treasury Keeps Its Cards Close

Despite mounting speculation, the Treasury has refused to confirm whether Chancellor John Healey intends to introduce changes to capital gains tax in the October Budget.

Officials have instead emphasised that all tax decisions will be announced during formal fiscal events rather than through media speculation.

A Treasury spokesperson said the Government remained focused on policies that would support businesses, ease pressure from the cost-of-living crisis and promote economic growth across every region of the United Kingdom.

That careful wording has done little to quiet expectations that significant tax reforms remain under active consideration.

A Defining Test for Labour

The debate surrounding capital gains tax illustrates the difficult balancing act facing Labour as it prepares its first Budget.

On one hand, ministers need additional revenue to finance public services and deliver campaign promises without dramatically increasing government borrowing.

On the other, they must avoid policies that discourage investment, weaken economic confidence or ultimately reduce tax receipts.

Whether Burnham follows Lord Kinnock’s advice could become one of the defining economic decisions of Labour’s first year in office.

As businesses, investors and households await Chancellor Healey’s Budget on October 28, the future of capital gains tax has become one of the biggest unanswered questions in British politics—one that could shape investment, public finances and economic growth for years to come.